EL Earnings Preview- A "Buy the Dip" Opportunity?
AInvestFriday, Aug 16, 2024 12:44 pm ET
4min read
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Estée Lauder is set to report its fiscal Q1 earnings on August 19, before the market opens. Analysts are expecting EPS of $0.27 and revenues of $3.81 billion.

On July 27, L’Oréal SA's CEO, Nicolas Hieronimus stated the he, anticipates slower growth for the global beauty market this year, revising the expected growth rate down to 4.5%-5% from an earlier forecast of 5%, due to weaker sales in China. This outlook was shared with investors at a JPMorgan event in Paris. The comments have helped lower the bar for ELs upcoming report.

BofA Securities recently downgraded the stock to Neutral, citing weaker-than-expected beauty category performance in China and softening demand in the U.S., which have undermined the company’s profit recovery prospects. Conversely, RBC upgraded the stock to Outperform in late July, believing that EPS and investor sentiment have hit a low point, with the potential for Estée Lauder to meet or exceed expectations this quarter despite challenges.

RBC remains optimistic, arguing that Estée Lauder's guidance already accounts for weakness in China and that there is room for margin expansion, particularly given the company’s profit recovery program. However, there is cautious sentiment as well, with Raymond James downgrading the stock to Market Perform due to slower recovery in key markets like China and the U.S., combined with intensified competition in the beauty industry. RAJA's more conservative outlook reflects these pressures, and they see few near-term catalysts for significant upside, even though Estée Lauder is making efforts to reposition for global growth.

The Wall Street Journal recently reported that Estée Lauder plans to retain CEO Fabrizio Freda despite the company's recent struggles and internal disagreements within the founding family. The board, after discussing Freda's future in May, decided to extend his tenure beyond June to help stabilize the company while initiating the next phase of CEO succession planning. On July 12, Estée Lauder announced that CFO Tracey T. Travis will retire on June 30, 2025, after over twelve years of service, with Akhil Shrivastava appointed as her successor effective November 1, 2024. Travis will remain at the company until her retirement to ensure a smooth transition.

On July 24, Estée Lauder announced updates to its Restructuring Program, expecting to record approximately $137 million in restructuring and other charges, primarily funded by cash from operations. To date, the company has approved $233 million in cumulative charges as part of the overall $500 million to $700 million anticipated for the program. Additional disclosures related to the restructuring initiatives will be made as they become significant. The company is committed to providing further updates once it can make informed estimates.

On May 1, Estée Lauder reported strong Q3 earnings, surpassing expectations with an EPS of $0.97, significantly higher than the FactSet Consensus of $0.50. Revenues rose 5% year-over-year to $3.94 billion, in line with estimates. The company's Skin Care segment saw a 9% increase in net sales, driven by growth across all regions. Makeup sales increased by 4%, bolstered by strong performance in travel retail and double-digit growth in Latin America and Korea. However, Fragrance sales grew modestly by 1%, while Hair Care sales declined by 4%, primarily due to weakness in the North American salon channel.

Despite the solid Q3 results, Estée Lauder issued cautious guidance for Q4 and FY24, citing macroeconomic headwinds, particularly in China, and geopolitical volatility. The company expects Q4 EPS to range between $0.18 and $0.28, well below the consensus of $0.75, with sales projected to grow 5% to 9% year-over-year. For FY24, Estée Lauder anticipates EPS between $2.14 and $2.24, slightly below the then-consensus of $2.25, and expects revenue to decline by 2% to 3%, translating to approximately $15.4-15.6 billion, also below the then consensus of $15.81 billion. Despite these challenges, the company remains confident in its long-term growth trajectory and is maintaining its full-year operating margin outlook.

Telsey Advisory Group lowered Estée Lauder's price target to $142 from $155, despite better-than-expected Q3 results driven by strong gross margin leverage and some sales upside from EMEA. The positive results included a shift in marketing expenses to Q4, but the Q4 outlook significantly missed prior expectations, leading to a moderated FY24 sales growth forecast. Although Q3 saw a substantial EPS beat and margin expansion, Estée Lauder only slightly raised its FY24 outlook, still falling short of consensus. Telsey maintained a Market Perform rating, citing ongoing macroeconomic concerns and the moderated topline guidance as reasons for the reduced price target.

Morgan Stanley downgraded Estée Lauder to Equal Weight from Overweight, citing disappointment in the company's slower-than-expected topline recovery despite the ongoing Profit Recovery Program aimed at boosting profitability and EPS. While they initially saw potential for a strong turnaround through improved productivity and innovation, the reduced topline guidance for Q4 and concerns about macroeconomic risks and market share issues have tempered their optimism. The firm acknowledges that the expected recovery in sales, particularly in the travel retail channel, is not materializing as anticipated. As a result, they see ongoing challenges extending into FY25/26, leading to the downgrade.

The set up around EL is interesting. The stock is down 35% YTD as expectations around consumer spending in beauty products remains low. The stock has shown signs of bottoming around the $88 level and has pressed into its 20-day moving average at $95. There is some concern that EL may provide a "kitchen-sink" quarter in which it clears out all the negative news to present its new CFO a "fresh start". Weakness in the Chinese consumer has been a key drag for the company but we are seeing reports that the Chinese government may provide more stimulus directly to consumers which should boost sentiment around EL.

We would view any dip in the stock on Monday morning as a buying opportunity as much of the negativity has been priced into shares.

Overall, the market remains divided on Estée Lauder's near-term prospects, with some seeing potential for upside while others remain cautious due to the company's reliance on struggling markets like China and the U.S., as well as the competitive pressures facing the beauty industry. The earnings release will be pivotal in assessing whether the company can stabilize and execute its turnaround strategy effectively.

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